No. 295: Asymmetrical Warfare

The truth is somewhere in the middle. It involves nuance and an unbiased view at the industry as whole to understand what’s occurring, as things change with light speed. The recent article in The Economist paints a pretty picture of a DTC industry. The industry, as a whole, is a lot more difficult than newly-minted retail entrepreneurs would like to think. Two things can be true: (1) stodgy old brands are run by career executives that don’t understand agility or innovation (2) most DTC brands will fail because they are run by former management consultants or recent MBA grads who do not value the powers of brand, relationships, and community.

Direct to consumer brands are difficult to scale. The assumption often made is that you can spend on design, manufacturing, packaging, and then acquisition. Spend, spend, spend, spend. Thus, the endless VC raises of $30 million or $50 million or even $100 million. The problem is that while able entrepreneurs can outsource design, manufacturing, packaging, and even acquisition – incumbent brands were built on relationships, consistency, value, and trust. Traditional DtC acquisition channels cannot immediately facilitate trust or value. That part takes an insane amount of work and consistency. It also takes offline interaction, a phenomenon that we’re watching in real time as “nearly 850 stores are due to open in the next five years.” [Forbes]

Industry giants took time to begin worrying about the arrival of game-changing newcomers; barriers to entry in their business are high. But by now the incumbents are stagnating. According to Nielsen, a consultancy, the biggest 25 food-and-beverage companies, for example, generated 45% of sales in the category in America but drove only 3% of the total growth in the industry between 2011 and 2015 (see chart). A long tail of 20,000 companies below the top 100 produced half of all growth.

If you ask Publicis Groupe’s EVP of Innovation Tom Goodwin about direct to consumer (DtC) brands, he will give you an earful. To be fair, defending Procter & Gamble is one of his chief functions. P&G is so important to his employer that they just announced a Cincinnati office to support P&G’s advertising strategies. In a October 22nd article that he wrote, he includes this hearty passage:

DNVBs may be a flash in the pan, they don’t have moats, they have fickle brands, they can die as soon as they fade and we can’t keep talking to the 1/100 companies that make it as anything other than survivorship bias.

He’s not entirely wrong. Just a few days earlier, I’d published an article on DTC brand defensibility where I wrote on how surviving brands established the moats necessary to be more than a flash in the pan. This era of the consumer web is defined by two groups jarring over you: the affluent, intelligent, busy, and principled consumer. We are communicating many of the same elements while landing on two distinct conclusions: he believes that DNVBs cannot last and I believe that they can. Our professional experience shades our opinions here. Five years ago: Jeff Blee, the former VP of buying and planning for Brooks Brothers, commented on an early stage DtC shirt maker:

Unperturbed by the newcomer, there would always be a market for shirts he described as “newer.” And, “any competition was good news.”

The iconic menswear brand has since adopted a Joseph A. Bank discount strategy (four shirts for $200) and Mr. Blee now runs a DtC apparel startup. This war between old and new is not limited to consumer packaged goods, or luggage, or dress shirts, or wooly shoes. It’s everywhere. In a recent article by someone at Business of Fashion (no byline), they discuss the woes of L Brands’ Victoria’s Secret and how “it can save itself.”

And yet, Victoria’s Secret still feels as though it’s stuck in a time capsule: an era when it was okay, even expected, to openly project the male gaze on women’s bodies, when uncomfortable push-up bras with air pumps were viewed as innovative, when people still shopped at the mall. This season’s show felt like an homage to itself. Between set changes, archival footage played in the background.

Their article builds on an earlier report by 2PM, where we laid out the increasing competition faced by the legendary intimates incumbent. What we’re seeing here is an onslaught by new, cheaper-to-run brands that are appealing to the senses and wallets of communities primed to look elsewhere. Not only are companies like L Brands (Victoria’s Secret parent company) and P&G (Gillette’s parent company) and Brooks Brothers competing on a shifting grounds of price, ease, and selection; they are competing on culture (size inclusivity, the “pink tax”, and shifts in where / how we work).

Look no further than the pushback facing the Victoria’s Secret CMO, 70-year-old Ed Razek, who was quoted to have said, “we attempted to do a television special for plus-sizes [in 2000]. No one had any interest in it, still don’t.” Fighting a battle on multiple fronts takes sensible leaders within an organization built for agility. These leaders must also be empathetic to consumers and progress. Needless to say, Razek’s comments were tone deaf and aloof. Currently, several top brands are competing against the L Brands subsidiary by designing and marketing more inclusive products. In No. 271, I wrote that Victoria’s Secret needed an update:

In addition to intimates brands expanding into VS’ territory, there are adjacent pressures from the athleisure market, an evolving beauty market, and the rejection of lingerie by consumers looking for comfort, function, and individuality. Rather than continue competing against the likes of Adore Me (21), THINX, Inc. (31), and Third Love (51), or Savage x Fenty, Victoria’s Secret could re-invest in the brand, messaging, and end-to-end processes by following Wal-Mart’s lead.

The news around Victoria’s Secret’s latest fashion show was, by all accounts, a fiasco. But the solutions are right before them. They should observe the legacy CPG industry. There, innovation often involves: youth, acquisition, and agility. Procter and Gamble is doing just that. The CPG conglomerate recently restructured to form smaller, agile teams and the Cincinnati company is open to acquisitions.

The evolution of the DTC era has more and more brands competing in physical retailers, adjacent to the CPG, apparel, and shoe companies who’ve existed for decades. There are dozens of brands, in each market segment, looking to compete for your dollars. Tom Goodwin is correct in his assessment of many of the brands who have raised exorbitant amounts of capital to acquire customers via paid media.

But that’s not the characteristic of the entire DtC industry. As media buying becomes more difficult for challenger brands, more direct-to-consumer brands will shutter. And competition will become more symmetrical and predictable as the hundreds of new brands narrow down to the sturdier dozen. P&G will shake off much of the newfound competition by adopting many of challengers’ practices (and brand IP via acquisition), as many begin to compete on familiar territory. But there will always be room for the independent challenger brands that get it right.